Predicting a bumpier economic landing
By Edmund L. Andrews The New York Times

Published: August 11, 2006
WASHINGTON In the cool and quiet marble corridors of the Federal Reserve, the strategy for taming inflation sounds painless, even soothing: a "soft landing" for the U.S. economy after several years of flying high.

As the central bank contended Tuesday, when it paused in a two-year campaign of interest rate increases, inflation is "elevated" right now but will begin to decline because economic growth is poised for a modest slowdown.

Many economists, however, warn that a "soft landing" may seem anything but, and suggest that the Federal Reserve is either too rosy about the looming slowdown or naïve about the difficulty of reaching its inflation goal.

The Fed has orchestrated only one soft landing: during 1994 and 1995, when its chairman, Alan Greenspan, was able to slow the economy enough to cool spending and ease inflationary pressures but not enough to cause a big jump in unemployment. But even Greenspan, legendary for his ability to fine-tune policy, presided over two recessions, in 1991 and in 2001.

This time, many analysts say the Fed and its new chairman, Ben Bernanke, face considerably tougher challenges. Oil is at more than $70 a barrel, unthinkable in 1995. Productivity growth, which was accelerating in 1995, is slowing. The dollar, which was climbing against other major currencies in 1995, is declining against most of them.

Analysts say that if Bernanke is serious about his goals for controlling inflation, at least two million additional workers might have to lose their jobs over the next two years.

"The economic slowdown has to be much more substantial than anybody in the Federal Reserve or on Wall Street is expecting," said Robert Gordon, a professor of economics at Northwestern University who has analyzed the trade-off between inflation and unemployment for the past several decades.

Bernanke and other Fed officials have often said they want to keep "core" inflation - excluding energy and food prices - below 2 percent a year. But core inflation is already 2.9 percent and almost certain to climb as oil pushes up prices for everything from air fares to plastics.

Gordon said that the past few decades had shown a grim but consistent trade- off: To reduce inflation by one percentage point, the unemployment rate has to rise about two percentage points for a year. So to reduce inflation to the upper limits of what Fed officials consider acceptable, more than three million jobs would be lost, a bigger decline than the one caused by the recession of 2001.

And that is Gordon's rosy scenario, which assumes no other shocks to the economy - no additional increases in energy prices, no collapse in the dollar, no collapse in the housing market. "I think the Fed is facing an absolutely classic case of stagflation," Gordon said, "a situation in which they cannot win."

The chairman of Roubini Global Economics Monitor, Nouriel Roubini, predicted that the economy would fall into a recession early next year as a result of high energy prices, higher interest rates and a collapse in the housing market.

"Either the Fed does not believe its own inflation forecast, which I don't think is the case, or the slowdown is going to be greater than what they have been saying," Roubini said. "They can't have it both ways."

Laurence Meyer, a former Fed governor and now a chief forecaster at Macroeconomic Advisers, said Bernanke needed to do more than replicate the one successful soft landing. Greenspan was not trying to reduce inflation, but keep it from rising. Bernanke, by contrast, is trying to reduce it substantially.

"With a computer, I can give you a soft landing if you give me 10 or 20 runs," Meyer said. "But in real life you only have one run."

So, let's just say that this recession does hit early next year. Say it's a pretty bad recession. With multiple millions of people losing their jobs, with an increase of several percentage points in unemployment for over a year. That would be.. hmm.. going into an election year. When people are measuring what the Republicans did for them and what the Democrats have done in the past. I think many people will remember the flush economy under Clinton (yes, it was a bubble, but people will just remember that they were doing better), and will think of the multiple recessions under Bush's administration. I really don't think that being in a hardcore recession after all the other scandals and such under the Republican controlled government will make for a happy constituency going into the elections in '08._________________A person's character is their destiny.

Last edited by MsFrisby on Sun Aug 13, 2006 7:07 am; edited 1 time in total

i hate to hope for a recession and a surge in unemployment, but most people don't seem to see the writing on the wall until you smash their faces into it._________________aka: neverscared!
a flux of vibrant matter

I usually just check that there's no "ADVERTISEMENT" in the middle and that the first sentence and last sentence are what they are supposed to be._________________A person's character is their destiny.

And they were. Huzzah!_________________The universe we observe has precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil, no good, nothing but blind, pitiless indifference.
- Charles Darwin